Start-ups can benefit from a wide variety of financing options on the path to profitability, but how do you know which one to choose? This course explores different financing models, including bootstrapping, organic growth, debt and risk capital, and also provides a clear overview of equity financing including the key types of investors: angels, venture capital, and crowdfunding. You’ll learn about terms, and term sheets, exit modes and what exit strategy might be best for you. By the end of this course, you’ll have an understanding of what success looks like and how it can be financed. You’ll also be ready for the capstone project, in which you will get feedback on your own pitch deck, and may even be selected to pitch to investors from venture capital firms.

Avis

CS

I have always been in start up business, and I deal with these everyday, and yet I still learned plenty from this course. Many thanks to all the professors. :)

AV

May 19, 2020

Filled StarFilled StarFilled StarFilled StarFilled Star

It was amazing to learn and understand with the quality of the detailed explanation the contents well explained and yet in details .\n\nJust loved it .

À partir de la leçon

Private and Public Financing, and Calculating Breakeven

This module was designed to give you a closer look at the advantages and disadvantages of both public and private financing, and to provide you with some simple but powerful tools for estimating how much capital you will need. You'll learn about the added benefits of working with venture capital firms, when and why to consider debt financing, and the latest trends in crowdfunding. You'll also learn to calculate how much money you are losing each month (the burn rate), and when you can expect to become self-sustaining (the breakeven point). By the end of this module, you'll be able to perform your own breakeven analysis so you can make a more informed choice about the best source of financing for you company.

Ethan Mollick

David Bell

Karl T. Ulrich

Transcription

One of the more exciting ways of raising funds over the past few years has been crowdfunding, which I spend a lot of my time studying and researching. So, I wanted to give you an overview of this exciting area of fund raising. Give you some of the earlier results from my research that might help you think about crowdfunding as a way of raising money for your start up, and sort of outline what I think some of the changes are going to be in the next few years. So if you watched my other lecture we talked a bit about how the world of funding is evolving. And that's being driven by the decreasing cost of launching a startup company, so the cost of launching a web based start up is followed by about three orders of magnitude since the late 1990's. We've seen similar interesting things in the launch of hardware companies and other sorts of start ups, basically there's so many more options available because the cost of raising money has been dropping. So we used to only have VC's and angel investors as options for fundraising which meant that you had to give up a large portion of your company to get money. But as the amount that you need to raise has dropped to launch a company, we had super angels enter the market, which are angel investors who make just early stage deals. And then seed incubators, like y-combinator and TechStars, that bring in promising companies in the very early stages of development provide them mentoring and give them some money for a small amount of equity. And then most recently, we had the rise of crowdfunding. And crowdfunding is exciting because it lets people go directly to their potential customers and raise money from them about products they're interested in. And crowdfunding is also interesting because while all of these other forms of fundraising, like VCs or angel investors have really relied on insiders, on having people who already were involved in the investment community giving money to your startup. Crowdfunding actually uses online communities, groups of individuals giving small amounts of money to make funding happen. So, it's a really exciting, interesting idea. It's much more democratic than these other forms of fundraising. So like many other new Ideas the term crowdfunding can often have multiple meanings, as we're sort of sorting out what is and what isn't crowdfunding. But generally, there are four types of crowdfunding out there. All of them involve reaching out over the internet to a large group of people to give relatively small amounts of money to you to help launch your business or idea. So we have equity crowdfunding and reward based, which I'll explain more about in a second. These are the two main categories that you've heard of. But there's also peer to peer lending like prosper.com where people give you loans online and then there's just charity or patronage based crowdfunding where you may raise money for a particular cause or campaign or for charity. So all four of these things are crowdfunding, but the two that are actually interesting to you as a founder of a company are either equity or award-based crowdfunding. So, equity crowdfunding is raising money and giving a percentage of your company away over the internet. And that's a relatively new form. And reward-based crowdfunding, if you've heard of Kickstarter or Indiegogo, there are many others, that is where you're raising money from people, and in return for raising that money, you're going to give them a product or a reward. So that might be the first copy of your new album, that might be a ticket to your play, or that could be the 3D printer once you've built it. And so in the equity crowdfunding space there's a lot of flux right now in the United States, so some countries this is legalized, in some it isn't. There's a series of complicated regulations in the FCC, which is the regulating body for the securities in the United States. There are three different titles under which crowdfunding, equity crowdfunding can be issued. So there's a Reg A+, which allows people to raise money from anybody. But it's very expensive and no one's really doing very much of it right now. There is Title II crowdfunding, which relies on accredited investors. So these are individuals in the United States who have very high levels of income and high levels of savings, and they're allowed to make investments that other people aren't. And then the area that's causing the most excitement right now, and is coming live in the United States in 2016 is Title III, which has a $1 million limit, and is more widespread, so not just limited to accredited investors. These are still very early stage, we don't really know what's happening here at this stage they're still heavily curated. So the platforms are launching, equity crowdfunding campaigns are picking which companies they actually want to list. Unlike Kickstarter where anyone can list a project. So equity crowdfunding is very promising but at this point it's still very confusing area where it's not clear who the winners are. And I would expect that through at least the middle of 2017 this area to be influx and not a particularly good bet for first time entrepreneurs. On the other hand, the reward based crowd funding kick starter Indiegogo, these ideas that I'm going to raise money and in return I'm going to give you something have been incredibly successful. So, they've raised billions of dollars, and they have proven to be very successful ways that people launch a company. So reward-based crowdfunding is where I'm going to focus most of our attention and I'll return a little bit to equity crowdfunding near the end of this lecture. So crowdfunding is interesting because it's actually become a very powerful source of new innovation and new companies. So I have on an Apple watch here but the wearable computing phenomenon was basically dead after some experiments in the early 2000s with computer watches until Pebble came along and launch its smartwatch on Kickstarter. Similarly, virtual reality was to considered to be something that no one was interested in until Oculus Rift launched its startup and eventually sold itself for $2 billion to Facebook. 3D printing has come in large part from places like Kickstarter, as have some really innovative ideas for how you can scan and measure a [INAUDIBLE] food, do fitness apps. So it's been really exciting and interesting area where lots of new companies and new ideas have come from. What's important to realize about crowdfunding, is that crowdfunding is not just about money. In fact, when I survey people that why they're seeking out crowdfunding, money is only the third or fourth most common reason why they're seeking funds. The biggest reason for seeking funds are because it either let's them figure out what the customer base is, the people raising money or it let's them build a community of interest. So get people excited about a product or it helps them get press. So money is an important part of crowdfunding, but it's only one piece. You're also advertising your company, you're getting some early traction and testing, whether or not people are interested. So it serves many different functions. And this shows you here some of the answers from a survey that I did looking at what people get out of crowdfunding. And what you could see is the main benefits to crowdfunding from people tend to be changing views about products, developing an exciting customer base, and bringing attention to a product. So, those are the areas where crowdfunding can really offer the most benefits to you. One important thing to realize about crowdfunding is almost all of the other lectures we're talking about are about pitching one group of people, venture capitalists. We've talked about in earlier lectures how you pitch companies, how you pitch VCs. So crowdfunding is interesting because you're talking to communities. And when you think about what sort of the big communication revolution of the early 2000s was, it was a birth of real online communities. So you follow people on Twitter and you know what they think. You communicate via whether its Reddit or Instagram or whatever sort of community that you used where you have a actual virtual group of people that you care about who share a common interest with you and you may never meet in person. So these communities will always communicate with each other. What they haven't been able to do is reach out and touch the real world in any way. But crowdfunding allows communities to support projects that they find to be worthwhile. So let me show you how this works with a little pop quiz here. So these are four movies that were listed on crowdfunding site Kickstarter, four proposals for movies. And I'd like you to guess which one you think actually got the most funding. So the first one is a documentary film about Bronycon, so bronies are people who dress up as children's characters from the cartoon My Little Pony, Friendship is Magic, and they go to conventions. So these people believe in the underlying ideas of love and magic of this children's cartoon. And there are adults who often dress up, adult men who dress up with these and go to conventions about it. The second is, a beautifully animated film that features some mythology. The third is, a documentary about hunting down Adam Sandler, who's a famous comedian and movie star. And then fourth is, about a computer hacker and a thriller. So based on what I was saying about communities, which of these do you think is going to be the most likely to be funded? So, the answer turns out to be the BronyCon documentary. Because the issue is, that these people who actually care about this children's cartoon and care a lot about this group. And feel like they're doing something important and special by being a part of this online community. Often feel that they're not being paid enough attention to, that they're being mocked online. So when somebody comes forward and proposes an idea to film a documentary about them. That's going to be accurate and is going to be sympathetic, that community responds and they raised over $300,000 for this movie. And through 2013, this was actually the most funded movie on Kickstarter, so you could see how it's not about just being a good idea. It's about appealing to a community, a base of people, who care about your idea. And you can activate to make people interested in your product or service. So, and this happens, not just in that movie though, it did come out and apparently you can watch it. But also even things like 3D printing, which are areas that maybe don't have large scale commercial appeal. But there's a community of people who care a lot about this and are willing to spend a lot of money to fund these ideas. So, crowd funding as about activating online communities. If you're not apart of a community, if there is no group of people you've built in and interested. That you already know about in your product, Crowdfunding may not work as well for you. One of the important questions of crowd funding is, what are the crowd funding backers are looking for. We find increasing evidences in my research that the crowd is looking for quality, just like investors do. So, I want to just tell you about a research project that I did. I was [INAUDIBLE] of Harvard Business school, that is exactly this issue. So, we were interested in the fact that in crowdfunding there is a, there's sort of two ideas of the crowd that you often hear people discuss. And so one of them was made popular in a 2004 book by James Surowiecki called The Wisdom of Crowds. And he argued, that crowds together get to make better decisions than individuals. But there's a book, it was written 100 years before. Called Popular Delusions and the Madness of Crowds. It suggested when you get big crowds of people together, you get witch hunts and fads and manias. So, the question becomes important in crowdfunding. Which is it? Are the crowds rational and wise? Or are they mad and insane and prone to sort of manias? So, we did a study to look at, to find out more about this. And we picked an area where there was the most subjectivity possible. So we figured areas like technology, there's a lot more objectivity, but what about something like theater. And what the motivating factor is, that as of 2012, more money goes to the arts from Kickstarter. Than from the National Endowment of the Arts, which is the U.S. government agency that funds the arts. So the question is, what happens to the arts as a result of this? So what we actually did was, we brought together a panel of experts. Who were judges for contests like the ones the National Endowment of the Arts puts on, who judge theater grants. And we asked them to judge a number of different Kickstarter projects. So, we picked 120 Kickstarter projects that we knew had failed or succeeded or not. And we showed the experts the pictures to see whether they would agree with the kinds of decisions that the Kickstarter backers made. And initially the experts were very skeptical that the Kickstarter backers would pick good projects. What we found is, that more than 60% of the time the crowds and experts actually agree with each other. And the more successful the project was, the more likely it was that the crowd and experts are going to agree with each other. Even more interesting is, when there is a disagreement, 75% of the time when the crowd and experts disagree. Is because the crowd is more willing to fund things than the experts were. So, the crowed is actually more willing to give money away, than the experts were. And both groups were looking for similar levels of quality. What was really interesting then is, we tracked these projects in the long term to see what happened next after they launched. And we found that the projects that both the crowd and expert agreed on generally were staged successfully. So when I say success from the slide, I mean that the production was successfully staged. It did not shut early but it also was not a big hit. So the expert and crowd case, there was one big hit out of the data set that we had and everything also has successfully staged. For the things that the crowd like that experts didn't, what interestingly happened, first we only had failure. In this case, it was a production where the New York Times wrote about it. While I was watching it, I tried to think of something good to say about this production. And I finally decided that the font on the play books was pretty nice, so very big failure, shut down after a single production. But everything else was success, except that the crowd actually was better able to select both artistic and commercial hits than the experts alone. So the crowd actually picked out the things that later won major theater awards, and the experts would have passed on those ideas. So all those suggest that the crowd is actually pretty wise in making these kind of decisions. And I've actually done some other research looking at exactly this set of issues. And trying to look up issues that the crowd might agree with experts on ininvesting. So, we know things that investors look for in a start-up company. They look for endorsements, so outside groups that say that a project or an idea is good. They look for experienced teams, they look for people who've shown progress with their prototypes and other things. And I've had every one of those factors also predict success in crowdfunding. So for example, having a spelling error, one spelling error, in your crowd funding campaign. Actually decreases your chance of success by 13%, so there are very big impacts to having a low quality campaign. On the other hand, I tried to look at things that the crowd might like that experts don't care about. So things like, the internet enjoys things like cat videos and discussions about bacon, at least in The United States. Turns out, those things don't predict success on Kickstarter. Saying that you're a geek or a nerd doesn't really have much of an effect. Though, there's a slight positive indicating that you're geeky about something. And even pop-culture things, like mentioning Star Wars or Star Trek or Super heroes, none of that leads to success. So all of our evidence seems to say, that quality projects are what the crowd is looking for. Ideally, ones linked to a community. And so, that's what you should be thinking about as you consider crowd funding as your approach. So a little bit on how to do it. First off, what you're seeing here are graphs. On the left side is, the pledge levels of successful projects so the one line means they raised exactly as much as they wanted. And you can see scaling to two, which means, they raised twice as much as they wanted in a campaign. And on the right side is failed projects, so the one here indicates the project's funded, zero means they received no funding at all. What you can see is, that success happens by small margins and failure, by large margins. What that means is, that your unlikely to raise many times your successful goal. And so, you need to think about setting an amount of money that you are trying to raise through crowd funding. That is appropriate for what you're trying to accomplish as a project. And you need to be careful that you're not hoping to be a ten time success. You might be, but as you can see here, the odds are rare. So, you should think about how you set up your goals to build yourself for success. The bigger the goal that you have, the lower your chance of success. But there could be more benefits, so you have to trade off on in these things. So another tip is, remember we're talking to the value of community in crowd funding. And when I ask people about why their campaign failed for those who did. The number one and two reasons listed for failure was, that they didn't really understand their target audience. And they didn't market to the target audience appropriately, so if you do crowd funding stuff. You need to be able to know your target audiences. Get them excited about your product and be part of, or know the community That you're trying to sell your product to and network connections matter a lot. So I actually taking an average project in the film category, I found that if that group had 10 Facebook friends, if that person pitched their product to 10 friends they'd have a 9% chance of succeeding. A 100 friends a 20% and a 1000 friends at 40% chance. So there's a huge impact in having a lead network. And that is the basis of your crowdfunding campaign. In my surveys I found this is not a easy part-time job. People spend an average of 30 hours a week working on their campaign, both before, during, and after. So that number doesn't fluctuate much. It's 30 hours setting up the campaign a week for about 4 to 6 weeks. About 31 hours while the campaign's in session, and about 31 hours a week afterwards, fulfilling the obligations of the campaign. So this is not something you can do casually, if you do real work. About two-thirds of the cases are done with teams. So you might want to think about who you could join up with. And then, spending time making sure your project is good makes a difference. So high quality videos, pitching your products seem to have a big impact on success. Posting frequent updates to your communities, seem to have an impact on success. Also, You can think about these sets of issues. Unfortunately, my data doesn't show much value in getting outside help. So I wasn't able to measure whether outside consultants help your campaign succeed in the first place or not. But if your campaign succeeds, there's no statistical effect of hiring outside consultants on raising more money than you anticipated. So outside consultants may help you kind of organize yourself. But they're not going to be the keys to running a giant campaign. You're going to have to do this starting with you, and your community. I would continue to wait, and see on equity crowdfunding as I discussed. So there's a thousand platforms that are currently lined up to compete in a space that right now is still mostly being done through, qualified investors. And there will be specific areas where there will be some impact. So we're seeing in real estate investment, the crowdfunding for equity is becoming more important. In some cases, like AngelList, which is a particular platform that is some sort of funding happening. But we're still in the very early days. So for right now, if you're watching this anytime in 2016, I would urge you to kind of think about waiting and seeing on whether equity crowdfunding's appropriate. And if it's later than that, you'll have more evidence to that point whether this idea's working or not. Equity crowdfunding is potentially really powerful. But the way its being implemented by the SCC, and by the platforms, may or may not be conducive to entrepreneur activity. I'd like to wrap up with some statistical data that we have on how you can get the most from crowdfunding. So, what this shows you is a chart showing various factors on one side and then showing, do those factors lead to a successful campaign? Do they lead to additional funding that happens after a campaign's over? Do they lead to additional benefits from a campaign? Like a campaign helping you better able to raise fund and money, being able to better find employees, or some other benefit to your business? And finally, does this factor lead to delivering a product on time? And what you could see is, successful campaigns, the larger your goal the less likely you are to be successful, which makes sense because you're trying to raise more money. If you get Kickstarter, or whatever site you're on, to feature you that advertising boost helps quite a bit. And having a lot of Facebook friends, as I mentioned, can also be very helpful, and also helps if you have an industry background, then it makes you credible in raising funds in a particular area. Now once you've raised the money, there's a bunch of things that might get you addition funding after a Kickstarter campaign closes. So, I found something around 12% of companies raise additional money after Kickstarter, either from bank loans or from venture capitalists, or angel investors. So, if you had a big success, if you raised a lot more than your intended goal, that increases the chance that you're going to get additional funding. If you have the right kind of background, again if you have industry experience, you're more likely to get additional after your crowdfunding campaign. And, this is where business plans actually matter. The more complete your business plan, the more likely you are to raise additional funding after your Kickstarter campaign. In terms of receiving additional benefits, the same stuff matters, right? Having a big goal, being very successful, being featured, having the right kind of background, having people endorse you, even having business and financial plans all tend to lead to you getting additional benefits from the campaign, additional press after the campaigns close, being able to hire employees, getting company alliances, so all these things can help you. And then finally by delivering a project on time, I find that the actual failure rate on Kickstarter is quite low, and around 9% of projects in Kickstarter failed to deliver on. But delays are quite common, and you're more likely to be delayed if you're a large project, or you raise a lot more money than you expected. But the more complete your planning, that reduces the chance of delay. So there's a lot of stuff here, and I hope it helps you think about crowdfunding as a campaign for you as well. And there's still a lot that we're learning about this. But it's a really exciting, interesting idea of being able to show traction, get customers involved in your product early on, and being able to raise money without having to give away equity. So I think crowdfunding is something certainly worth considering, especially if you're producing a physical good or product or something aimed at consumers. So this won't work well for Enterprise software. This is not going to work well, if you're trying to build something that's business to business. But if you have a consumer oriented business, and you have an innovative idea, crowdfunding is something you should consider.